BDO Indirect Tax News

Spain - Supreme Court rules on proportionality of penalties related to the reverse charge

Spain’s Supreme Court published two decisions on 3 September 2023 that involve the application of a 10% penalty on VAT quotas that were incorrectly declared by the recipient on supplies of services subject to the reverse charge. The court cancelled the imposition of the penalty on the grounds that it violates the proportionality principle under EU law.

The case arose out of an appeal filed in 2021, in which the taxpayer asked whether a judicial body could cancel a penalty imposed for an offense specified in Spain’s VAT Act. At issue specifically was whether the 10% penalty is proportionate to the infraction, which only involved incorrect reporting and the tax authorities did not suffer any loss of tax revenue.

Under Spain’s VAT law, the 10% penalty is imposed where a taxpayer fails to comply with a formal procedural requirement in a transaction subject to the reverse charge. As the penalty is a percentage of the unreported quotas, in the case before the court, the penalty is fictitious or irrelevant since it does not:
  • affect revenue in any way, as the amount is zero euros, as confirmed by the tax authorities;
  • is imposed regardless of any indicia of tax fraud; and
  • comply with the proportionality principle, as the imposition of penalties "cannot go beyond what is necessary to ensure the correct collection of the tax and to prevent fraud;" in this case, the penalty was imposed regardless of whether fraud is involved or whether there is an effect on revenue.
Despite the lack of harmonisation in this area of EU law, the Court of Justice of the European Union (CJEU) has weighed in on national tax penalty legislation based on the proportionality principle. In 2017, the court issued a decision in a case (Farkas) where the reverse charge should have been applied but was not and the tax authorities imposed a penalty equal to 50% of the VAT due. The CJEU held that the 50% penalty was disproportionate and stated that the tax authorities cannot impose penalties where they are unable to show that they lost tax revenue and there is no evidence of abuse or avoidance.

Based on the above, the Spanish Supreme Court held that the 10% penalty was not proportionate and annulled it.

The Spanish Supreme Court decision establishes an important precedent for the application of the proportionality principle in the context of VAT penalties. Going forward, penalties imposed for failing to comply with formal requirements may be successfully appealed to a judicial body when the proportionality principle is challenged.

Álvaro Gómez-Elvira
Ana Acero
BDO in Spain